Do you have an investment drawbridge? Here’s how to make your own
It is not the typical image of a drawbridge that one might imagine. There are many different types.
I was recently in South Florida for a while this winter to escape the northern cold and snow. Occasionally I stopped at the Intracoastal drawbridge which is raised to allow large yachts and sailboats to keep moving forward. Didn’t pay attention to the schedule, and unfortunately hit it at the wrong time (they go up twice an hour during the day).
This got me thinking about the origins of drawbridges and their early use. Their origins date back to medieval times. There are many different versions of drawbridges, but the original design was to build castles with moats around them that would keep attackers and enemies out.
Usually located on hills, these castles had the advantage of being able to see in any direction and at many distances. These castles were connected across the moat by drawbridges that could be raised at any time.
Castles also created other types of defensive drawbridges like the image above that could seal off the main part of the castle if the enemy further penetrated the other encumbrances.
As we have come to understand, these concoctions were invented with one goal in mind…to create a defensive, protective, and life-saving mechanism.
We have done something similar by developing trading rules, proprietary indicators and mechanical trading systems that incorporate acute risk aversion methodologies.. I like to think of it as our ability to help you build your investment drawbridge.
This came from our many years of trading experience in commodity pits in New York. Since we were trading our own accounts (our own $), we had to know, believe and understand that RISK counts in dollars and cents. It was self-preservation.
To this day, the mantra holds true. If you can protect your investment dollars from unforeseen enemies, you will preserve capital and have more to work with in the next up cycle. That’s why we spend so much time and effort developing investment solutions and educating people about the “hidden enemies” of risk and downside.
This concept has been a main construction in all our investment strategies. From Sector Plus (ETFs), to investing in highly volatile small caps, cryptocurrencies and even our own discretionary Mish service… all use risk aversion techniques to mitigate the dangers that might lie in wait for market haters.
This week has seen more evidence of the need to fight these enemies, which all seem to have been hit at the same time: higher (rising) interest rates, spiraling inflation, rapidly rising oil prices. food and energy, all against the backdrop of a slowing economy, monetary policy and expectations of .
The result is high volatility, shrinking multiples on equities, a sell-off in fixed income securities and enormous uncertainty about our financial markets.
More importantly, as recently as the past week, we’ve seen a high percentage of stocks (and ETFs) come under selling pressure, leaving investors with virtually nowhere to hide but cash.
Our own Mish, appearing on several national television trade shows, continued to ‘turn’ the tide and make it clear that she was not enthusiastic about buying stocks and believed markets remained ‘limited’ .
Even after a huge one day rally. For those of you not so familiar with distance, it literally means: it’s a traders market. A huge rise over a day or two followed (like this week) by sudden reversals and two days of declines.
The market has been showing such trends since the beginning of the year. It’s a choppy ride and, for most investors, exhausting. Little or no progress is being made for the average investor. If you follow the likes of ARK Innovation ETF (NYSE:) and other recent hot spot managers, it could mean your investment is down 25-50%.
Investors need to keep up to date with one of the most important rules in investing. Rule #1 Minimize loss of money. Rule #2 don’t forget rule #1. Here is an important chart to remind you of the dangers of NOT having your investment drawbridge:
Here are some ways to build your own drawbridge:
- Make sure to include CASH as one of your asset classes. It is far better to turn to cash and preserve capital when the market is too volatile and you feel uncertain. Don’t let anyone (even your advisor) tell you that you shouldn’t store your assets in cash.
- Diversify, diversify and diversify. Several of our investment strategies have been investing in agricultural, energy and metal ETFs since the end of 2021. These strategies are mostly positive for the year.
- Look to other markets other than the United States. Do not lock yourself into the obligation to invest only in our markets. Often, when our markets falter, another country can do well. We have a strategy for that. Lately, some of the world’s emerging markets have started to look attractive.
- Use hedges and put in place appropriate means to minimize wild swings. A few of our investment strategies have invested in an inverse ETF that effectively puts the investor in a position to prosper during a bear market. These ETF instruments can be traded in seconds during the trading day, have huge volume, and are easy to enter and exit.
- If you own stocks, even at low cost, DO NOT be afraid to sell some stocks. Far better to pay the IRS than Mr. Market who can be ruthless when you have nice profits dropped very quickly. Look at Netflix (NASDAQ:) last week as a good example.
- Consider using derivatives to hedge your positions. This would include “writing” call options, buying put options, or buying other instruments that can hedge your entire portfolio. Mish recently had his followers put on a volatility instrument that effectively invests in a trade that focuses on insuring against a lousy market. (And it got really ugly this week).
Market Snapshot This Week:
- All key US indices closed bearish across the board on their daily charts and are not oversold based on our Real Motion indicator (-)
- Volume patterns show a strong distribution across 3 of the 4 key indices – excluding the ) – with zero days of accumulation over the past two weeks, which is not surprising given that it is down more than -18% since the start of the year and -3% on Friday alone (-)
- The sector summary took no prisoners this week, with essentially everything abandoned across the board, with particularly bad outages in retail () -4.5% and energy () -4.6% over the week (-)
- The hottest spot in the market this week was volatility (), which should come as no surprise given the major breakouts across all major indices and profit taking in commodities to end the week (-)
- Market internals have deteriorated, but are not oversold, indicating that there is most likely more downside potential next week (-)
- There was a significant reversal in the New High/New Low ratio for SPY and QQQ, with a sharp downward spike signifying new lows for each index (-)
- Despite this week’s massive sell-off, risk gauges are still in a neutral phase of weakening and are likely to crash further next week (-)
- Short-term volatility (VXX) broke out and closed above the 50- and 200-day moving averages, and also saw a golden cross last week on those same moving averages. Another important point to watch is that VXX closed just above its 50-week long-term moving average (-)
- The number of SPY stocks that are above their 10-day moving average is only 17% and moderately oversold, but there is still plenty of room for further deterioration (-)
- The yield curve is always inverted in the farther durations (-)
- There was a breakdown in Value () and Growth () stocks this week, however, VUG sold around -4% vs just -1.8% in VTV (-)
- Every member of Mish’s modern family is in a bear phase and not yet oversold according to Real Motion (-)
- Foreign equities were not spared this week’s fall, with both selling and bearish phases. However, Triple Play indicates improvement in foreign equities versus US equities on a relative basis (-)
- Essentially, the entire commodity market average has returned to the downside, but still significantly outperforms equities (-)
- The () gained across the board against nearly every other major fiat currency this week (=)
- US long bonds () sold off once again on a further rise in bond yields, but TLT still outperformed equities by a wide margin and could brace for a possible mean reversal from oversold levels (an indication that the Fed rate hikes could already be priced in the market) (=)